I. Massachusetts Adoption of the Internal Revenue Code
Massachusetts Corporate Excise. In general, a corporation's net income is defined as gross income less the deductions (with certain exceptions), but not the credits, allowable under the Code, as amended and in effect for the taxable year. G.L. c. 63, § 30(4). However, under G.L. c. 63, § 30(4)(iv), Massachusetts does not allow the deduction at § 168(k) of the Code, which provides a special allowance ("bonus depreciation") for certain property acquired after September 10, 2001, and before January 1, 2005. Massachusetts also decoupled from IRC § 168(k) for purposes of the financial institutions excise and the utilities excise. G.L. c 63, §§ 1, 52A. See TIR 02-11.
Massachusetts Personal Income Tax . Generally, with respect to the personal income tax, Massachusetts adopts the Code as amended and in effect on January 1, 1998. G.L. c. 62, § 1. However, Massachusetts adopts the current Code with respect to certain sections. Id. Massachusetts generally follows current Code for § 62(a)(1), trade or business expense deductions, but Massachusetts specifically disallows the bonus depreciation deduction at IRC § 168(k). G.L. c. 62, §§ 1(c); 2(d)(1)(N). See TIR 02-11.
II. Election To Expense Depreciable Business Assets under IRC § 179; Additional Rules for Listed Property at IRC § 280F
For purposes of both the corporate excise and the personal income tax, Massachusetts generally follows current Code for § 179 which provides an election to expense certain depreciable business assets. The 2003 Federal Act amended IRC § 179 to increase both the deduction dollar limit and the threshold for figuring any reduction in the dollar limit. Subject to the rules and limitations included in § 179 and § 280F, for both corporate excise and personal income tax purposes, Massachusetts adopts the increased maximum § 179 deduction of $100,000, as well as any inflation adjustments to this amount, for taxable years beginning after 2002 and before 2006.1
Listed Property. Code § 280F limits annual depreciation deductions for certain "listed property," including passenger automobiles and other property used for transportation.2 Any deduction allowable under IRC § 179 with respect to listed property is subject to the limitations of § 280F in the same manner as if it were a depreciation deduction allowable under § 168.3 As part of the amendments to IRC § 168(k), the 2003 Federal Act increased the limitations on first-year depreciation for certain business property that is listed property under § 280F, but due to decoupling from IRC § 168(k), Massachusetts law does not incorporate these increases for purposes of both the corporate excise and the personal income tax.
Passenger Automobiles. Federal law requires the limitations on depreciation deductions at IRC 280F to be increased by a price inflation adjustment amount for passenger automobiles.4 Rev. Proc. 2003-75 contains various inflation adjustment tables for depreciation limitations for business vehicles placed in service in 2003 depending on both the vehicle classification and the system of depreciation used.5 For both corporate excise and personal income tax purposes, Massachusetts follows only those inflation adjustments found in Rev. Proc. 2003-75 that do not incorporate the increases enacted by the amendments of IRC § 168(k); Massachusetts does not adopt the higher limitations in Rev. Proc. 2003-75 for "§ 168(k)(1) property" or "§ 168(k)(4) property."
Accordingly, for property placed in service in 2003, in determining the Massachusetts depreciation limitation amount for both corporate excise and personal income tax purposes, taxpayers are permitted to use the following tables in Rev. Proc. 2003-75:
Table 1. Passenger automobiles (that are not § 168(k)(1) passenger automobiles, § 168(k)(4) passenger automobiles, trucks, vans, or electric automobiles).
Table 4. Trucks and vans (that are not § 168(k)(1) passenger automobiles or § 168(k)(4) passenger automobiles).
Table 7. Electric Automobiles (that are not § 168(k)(1) passenger automobiles or § 168(k)(4) passenger automobiles).
In Rev. Proc. 2003-75, Tables 2, 3, 5, 6, 8 and 9 allow higher federal depreciation deductions for passenger automobiles that are also IRC § 168(k) property, but these deductions are not adopted by Massachusetts. Where a taxpayer is allowed to use one of the tables for IRC §168(k) property in Rev. Proc. 2003-75 for federal purposes, the taxpayer must use the appropriate Table 1, 4 or 7 for Massachusetts purposes.
III. Modifications For Decoupling From Federal Bonus Depreciation At IRC § 168(K) For All Taxable Years Business Assets Are In Service
Bonus depreciation is that part of any depreciation allowed in computing federal taxable income that is attributable to the special first-year depreciation for qualified property allowed under IRC § 168(k). The 2003 Federal Act amended IRC § 168(k) to increase first-year bonus depreciation from 30% to 50% of the adjusted basis of qualified property.6 For federal purposes, in order to qualify for the 50% bonus depreciation deduction, the property must be acquired after May 5, 2003, and before January 1, 2005.
As explained above, for purposes of both the corporate excise and the personal income tax, Massachusetts does not adopt any of the provisions of IRC § 168(k). Thus, the federal changes to IRC § 168(k) that occurred as a result of the 2003 Federal Act are not recognized for Massachusetts purposes. A Massachusetts taxpayer that claims bonus depreciation under IRC § 168(k) for federal purposes must calculate a separate depreciation schedule for purposes of claiming depreciation on the Massachusetts corporate excise return or the Massachusetts personal income tax return. For the year property is placed in service and subsequent years, a taxpayer must calculate Massachusetts depreciation as if the taxpayer elected not to utilize the bonus depreciation allowance at IRC § 168(k).
IV. Effect of Depreciation on Basis; Modifications to Gain or Loss in Year of Disposition
In the case of any depreciable asset where Massachusetts depreciation is different from federal depreciation as a result of decoupling from Code § 168(k), the basis of the asset must be adjusted annually for Massachusetts tax purposes. For purposes of both the corporate excise and the personal income tax, upon disposition of depreciated property, any gain or loss must be calculated using the depreciation allowed under the Massachusetts method cited above. In the year of disposition, adjustments to federal gains or federal losses must be made to reflect the disallowance of bonus depreciation. As a result of the difference in basis, the gain or loss reported on the federal return will be different than the gain or loss reported on the Massachusetts return.
Commissioner of Revenue